PUBLIC GOODS
(Visual 1)
• A public good is a good that is provided in the same
amount to all consumers if provided at all.
• A pure public good is non-excludable and non-rival.
Once provided it is impossible to prevent agents from
consuming it. One agent’s consumption does not
reduce the amount available to other agents
Examples: Public TV, World Service Radio, and Air.
• A free-for-all public good is non-excludable and rival.
It is impossible to prevent agents from using it. One
agent’s consumption does reduce the amount
available to other agents.
Examples: Roads – Fish – Public Beach
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TRAGEDY OF THE COMMONS
(Visual 2)
• 1832 – Wm. Forster Lloyd – Observed the devastation of
common pasture and the puny and stunted draft animals
that grazed there.
• 1968 – Garrett Hardin created the economic term,
tragedy of the commons.
• The commons refers to any resource shared by a group of
people.
• Each household has the right to take resources from and
to put waste into the commons.
• As population grows, greed runs rampant, and the
commons collapses. Hence, the tragedy of the commons.
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EXTERNALITIES
(Visual 3)
• Externalities: Occur when the production on
consumption of one agent affects another’s
• Negative Examples: Mobile phone use in public
places, toxic waste dumping reducing fishing yields,
loud music in residential neighborhoods.
• Positive Examples: A neighbor who landscapes his
property, soothing music in dentists’ offices, regular
exercise program.
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PIGOUVIAN TAX
(Visual 4)
• Pigouvian Tax – The government taxes the company
for each unit of pollution it emits.
 Companies have an incentive not to pollute.
 Extra costs get passed on to the consumer.
 Government uses the funds to fight pollution.
COASE THEOREM
(Visual 5)
• Coase Theorem - Private parties can bargain
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without cost over the allocation of resources, they
can solve the problem of externalities on their own
 Disputes over resources arise because nobody
owns them or because everybody owns them.
 A private property system in which rights are
clearly defined and in which the cost of exchange
is negligible will achieve the optimal allocation
and efficient use of resources.
(Visual 6)
COASE THEOREM
1.What if the factory is given the right to dump?
2.Which alternative seems to be the most advantageous
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to the fisherman?
3.How might a reasonable and equitable solution be
achieved?
4.Which of the alternatives seem to be the most
equitable?
5.What are the negative and positive externalities if
property rights are assigned to the fishermen?
6.What are the negative and positive externalities if
property rights are assigned to the factory?
7.What solutions apart from Coase could solve this
problem?
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